Breakeven Analysis

BREAK EVEN digest Break-even is the point at which a product or service gelt saluteing m matchlessy to produce and sell, and starts generating a profit for your business. This means gross gross sales have reached sufficient volume to cover the multivariate and rigid be of producing and distributing your product. Type the document subtitle KOMAL BHILARE ROLL NO 85 2013 DEFINITION Break charge is the sales point at which the Company neithermakes profit nor suffers loss, or sales level where furbish up price ar fully confined by or the level where office margin equals the fixed monetary value.Breakeven analytic thinking provides data for profit planning policy formulating and de preconditionination making Break-even compend may be based on historical data, past ope dimensionns, or future sales and be, Depending on instructions need and desire. The check off even analyses technique is utilise in variousbusiness decision making areas, as this help in knowing the mini mum desire level to be achieved to avoid loss situation. The Breakeven analysis is mostly used at the time ofinvesting in red-hot project and introducing new products. The organizer of this workshop must have beguilen Breakeven for this workshop. employ OF BREAK EVENANALYSES ?Hospital or Hotel management would like to know salespoint in terms of number of beds/ rooms, to recover fixed cost to reach at a breakeven point. ?The school owner would be implicated in knowing minimum number of students to be admitted to reach atbreakeven ?New branch of bank would need to know minimum deposits from client ?On introduction of new products certain huge salespromotional expenses are planned in order to achieveplanned sales. The management while deciding about approving expenditures would be interested to see cost / benefit analyses or minimum expected sales (break even) to be achieved to recover these expenses (disregarding the very ambitious sales budgets submitted by the sales and trade team) FORMULA A) Breakeven point of output = (fixed cost) / ( component per social unit) Where, Contribution=selling cost variable cost placed cost= Contribution -profit B) Breakeven point of sales = 1. Fixed worth x SP per unit Contribution per unit 2.Fixed Cost x Total Sales Total Contribution BREAK EVEN chart Uses of Breakeven Chart A breakeven chart can be used to generate the effect of mixed bags in any of the following profit factors Volume of sales Variable expenses Fixed expenses Selling price PROFIT VOLUME balance (P/V RATIO) The ratio of contribution to sales is P/V ratio or C/S ratio. It is the contribution per rupee of sales and since the fixed cost body constant in short term period, P/V ratio will also measure the rate of change of profit due to change in volume of sales.The P/V ratio may be expressed as follows P/V ratio = Sales Marginal cost of sales = Contribution Sales Sales = Changes in contribution = Change in profit Changes in sales Change in sa les A fundamental prop of marginal costing system is that P/V ratio remains constant at different levels of activity. A change in fixed cost does not affect P/V ratio. The concept of P/V ratio helps in determining the following Breakeven point mesh at any volume of sales Sales volume undeniable to earn a desired quantum of profit Profitability of products Processes or departments the contribution can be increased by increasing the sales price or by reduction of variable costs. MARGINAL COST A marginal cost is another term for a variable cost. The term marginal cost is usu whollyy applied to the variable cost of a unit of product or service, whereas the term variable cost is much commonly applied to resource costs, such as the cost of materials and poke hours.Marginal costing is a form of management accounting based on the distinction between a. the marginal costs of making selling goods or services, and b. fixed costs, which should be the same for a given period of time, c areless(predicate) of the level of activity in the period. Suppose that a blind drunk makes and sells a single product that has a marginal cost of ? 5 per unit and that sells for ? 9 per unit. For every additional unit of the product that is made and sold, the firm will incur an extra cost of ? 5 and receive income of ? 9. The simoleons elucidate will be ? 4 peradditional unit.This net gain per unit, the difference between the sales price per unit and the marginal cost per unit, is called contribution. Contribution is a term meaning making a contribution towards covering fixed costs and making a profit. beforehand a firm can make a profit in any period, it must first of all cover its fixed costs. Breakeven is where natural sales revenue for a period just covers fixed costs, expiration neither profit nor loss. For every unit sold in supererogatory of the breakeven point, profit will increase by the amount of the contribution per unit LIMITATIONS OF BREAK EVEN ANALYSIS It is be st suited to the analysis of one product at a time. * It may be difficult to bar a cost as all variable or all fixed and there may be a tendency to hold on to use a break even analysis after the cost and income functions have changed. * Break-even analysis is only a supply side (i. e. costs only) analysis, as it tells you nothing about what sales are actually seeming to be for the product at these various prices. * It assumes that fixed costs (FC) are constant. Although this is true in the short run, an increase in the scale of output is likely to cause fixed costs to rise.